Here's a thought experiment that helped me reason through SBC and GAAP.
Scenario A: Company hires an engineer with a base salary of 100k/year, and 100k/year worth of SBC.
Scenario B: Company convinces an investor to invest 100k/year... and also hires him as an engineer with a base salary of 200k/year.
From a business fundamentals and margins perspective, the two scenarios are identical. And yet, in scenario A, the company is spinning their non-GAAP annual expense as being 100k. Whereas in scenario B, the company wouldn't even try to spin their annual expense as being anything other than 200k.
The above thought experiment becomes particularly powerful if the hypothetical company has no other expenses and an annual revenue of $150k. Using the non-GAAP estimates from scenario A can mislead investors into thinking that the company has a very healthy gross margin, and is a lucrative investment. Whereas the actual GAAP numbers from both scenarios A and B, make it clear that the business is not profitable at all.
Scenario A: Company hires an engineer with a base salary of 100k/year, and 100k/year worth of SBC.
Scenario B: Company convinces an investor to invest 100k/year... and also hires him as an engineer with a base salary of 200k/year.
From a business fundamentals and margins perspective, the two scenarios are identical. And yet, in scenario A, the company is spinning their non-GAAP annual expense as being 100k. Whereas in scenario B, the company wouldn't even try to spin their annual expense as being anything other than 200k.
The above thought experiment becomes particularly powerful if the hypothetical company has no other expenses and an annual revenue of $150k. Using the non-GAAP estimates from scenario A can mislead investors into thinking that the company has a very healthy gross margin, and is a lucrative investment. Whereas the actual GAAP numbers from both scenarios A and B, make it clear that the business is not profitable at all.